Subscription Lines, Asset-Based Leverage, the Turn to CLOs, and the Rest of the Toolkit
I. Executive Summary
“The BDC borrower has come full circle: lenders and investors that pulled back are once again competing for a seat at the table, and the BDC of today has more financing tools available to it than at any point in the product's history. We are glad we never left.” - Dechert
Business development companies (BDCs) sit at the epicenter of the private credit growth story, and their financing structures have come full circle, evolving from relatively simple credit facilities into a genuine spectrum of bespoke leverage tools now attracting renewed capital from every corner of the market: subscription-style facilities keyed to investor commitments, net asset value and asset-based facilities based on the underlying loan portfolio, syndicated ABL facilities extended through special purpose vehicles, unsecured institutional notes placed privately under Section 4(a)(2) of the Securities Act, publicly issued baby bonds and convertible notes, structured credit products such as repos and total return swaps, and, increasingly, term financing through the middle market collateralized loan obligation (CLO) market.
This OnPoint, drawing on Dechert’s more detailed treatment of these tools in the International Comparative Legal Guide (ICLG) chapter Financing Your Private Debt Platform, revisits the fundamentals of BDC financing, then turns to what has changed most recently: renewed lender and investor engagement across the BDC financing spectrum, as market participants who had grown more cautious amid erroneous and overly negative headlines about private credit gradually return to the space; an evolving ABL facility market that is prompting sponsors to broaden their lending relationships; a growing role for subscription-style facilities and structured credit products in supporting liquidity management; and a marked shift toward CLO issuance, including CLOs sponsored and managed directly by BDCs, as a source of diversified, long-term capital. Dechert has been at the forefront of this evolution from the outset, having represented lenders and BDC sponsors on the first-ever financings and CLOs done by BDCs and, more recently, on the first-ever rated middle-market CLO in Europe, and the firm remains the most active law firm representing BDCs across the full range of financing structures described below.
II. Back to Basics: How a BDC Financing Is Built
A BDC occupies an unusual position among fund finance borrowers. It is a closed-end investment vehicle regulated under the Investment Company Act of 1940, subject to statutory diversification, affiliate transaction and distribution requirements, yet it is financed and diligenced in ways that borrow heavily from private equity fund finance technology on one side and portfolio-company asset-based lending on the other. Which technology applies to a given BDC, at a given point in its life, depends principally on whether the BDC still has meaningful uncalled investor commitments or has instead built out a seasoned portfolio of loan and equity positions.
Subscription-Style Facilities for Newer or Non-Traded BDCs
A BDC that is still raising capital, particularly a non-traded or perpetual-life vehicle marketed through a continuous offering, typically has an investor base with an ongoing capital commitment analogous to an LP in a traditional private equity fund. Lenders to these vehicles look primarily to the uncalled commitments of that investor base, sizing the borrowing base and advance rate off investor credit quality much as they would in a conventional subscription facility, with diligence concentrated on each investor's obligation, and capacity, to fund a capital call.
ABLs for Seasoned or Listed BDCs
Once a BDC has built out its investment portfolio, or has converted into (or launched as) a listed vehicle with no ongoing investor capital commitment, the collateral analysis shifts to the underlying assets themselves: promissory notes and other debt instruments evidencing loans made by the BDC, equity positions in portfolio companies and related deposit and securities accounts. Facilities structured this way resemble an asset-based loan, with borrowing base mechanics built around portfolio diversification limits, caps on any single position or asset type, minimum position counts, and non-performing asset thresholds, together with covenants and prepayment triggers tied to portfolio performance.
In our experience structuring these facilities, advance rates for first-lien debt can run high, with lower advance rates for second-lien, mezzanine and equity positions, and the borrowing base typically excludes defaulted loans, CLO or fund investments, joint ventures, and investments secured by mortgages or consumer obligations. Assets can generally be added to the borrowing base without lender consent so long as they satisfy pre-agreed eligibility criteria and concentration limits, and advance rates often step up as the BDC's asset-coverage ratio improves above certain specified thresholds. Financial covenants in these facilities typically include minimum asset coverage, minimum equity, liquidity, interest coverage and net worth tests, while cash management tends to be lender-friendly by comparison with an ABL structure: cash is generally not swept to a lockbox or subject to a waterfall at all times, and the lender's control over cash is usually triggered only upon an event of default.
Structuring Considerations That Cut Across Both Models
Regardless of which collateral model applies, several considerations recur. A BDC's statutory asset coverage requirements (200% historically, reducible to 150% for electing BDCs under the Small Business Credit Availability Act) cap the leverage a facility can actually deliver, and a conversion event, such as a private BDC listing on an exchange, can trigger a mandatory constituent-document amendment and an automatic repayment obligation under an existing subscription-style facility. Restrictions embedded in the BDC's own investments, whether a loan's transfer or assignment restrictions or a portfolio company's consent rights, also need to be cleared, waived, or otherwise addressed before those assets can be pledged as collateral.
III. Subscription Facilities: A Renewed Source of Lender and Investor Confidence
Subscription-style facilities for BDCs are attracting renewed and growing interest from lenders, who see this segment of the market as an attractive complement to their traditional subscription-finance books. Semi-liquid, non-traded BDCs, together with the closely related interval fund structure, generally offer investors periodic and structured liquidity: a BDC typically caps its discretionary tender offers at around a small percentage (e.g., 5%) of outstanding shares, while an interval fund conducts periodic repurchase offers within a higher band (e.g., 5% to 25%) and holds liquid assets sufficient to cover the announced repurchase amount.
Lenders continue to find subscription facilities attractive for BDCs precisely because the collateral, uncalled investor commitments, gives a lender a self-correcting borrowing base that tracks the fund's capital base in real time, without requiring the fund to liquidate portfolio assets to fund periodic repurchases. For a BDC, the board's discretion to manage the pace of tender offers functions as an additional structural comfort for the lender, supporting continued confidence in the facility even as the fund's investor base evolves over time. In our own practice, we have seen lenders extending this kind of facility today engage constructively with sponsors, focusing their diligence on the fund's gating and repurchase mechanics, the sponsor's financial strength and reputational commitment to the platform, and the granularity of the fund's disclosure around portfolio valuation.
As a structural matter, a BDC subscription facility is documented much like a conventional fund subscription line: the borrowing base is sized off the credit quality of the underlying investor pool and its uncalled commitments rather than off portfolio assets, so covenants and operating restrictions apply at the fund level, and, unlike a bankruptcy-remote SPV financing, a default at the fund generally is not insulated from the rest of the fund's financing stack. In exchange for that structural simplicity, sponsors typically retain considerable flexibility: there are generally no prepayment penalties or make-whole premiums, mandatory prepayments are usually limited to a borrowing-base deficiency, the availability period end, specified prepayment events, or maturity, and the fund typically remains free to make new investments regardless of whether a given asset is later included in the borrowing base.
One increasingly common variation worth flagging is the hybrid subscription and ABL line, which folds both investor capital commitments and portfolio investments of the fund into one borrowing base. Some hybrids run separate interest rates for each borrowing base component, while others blend rates depending on which component is more heavily drawn. A common design has the facility start life as a subscription line and evolve toward an all-assets ABL as capital is called and the fund matures, easing investor-related restrictions and reporting as the collateral focus shifts to the underlying portfolio, which ensures continuity of access to liquidity across the early ramp-up and later seasoned phases without a refinancing event.
IV. ABL Facilities: Lenders and Investors Return to the Table
The market for ABL facilities, where a BDC or an affiliated private credit vehicle finances its seasoned loan portfolio through an SPV borrowing base facility from a bank, has continued to evolve meaningfully over the past year. After a period in which erroneous and overly negative headlines about private credit prompted some lenders and investors to pull back or take a more cautious posture, the ABL market has steadied and improved: a number of banks that had paused new commitments are re-engaging, and investors who had grown more selective are showing renewed interest in the asset class. The terms of that evolution are worth walking through in some detail.
Structurally, this ABL facility runs through a bankruptcy-remote special purpose vehicle: the BDC or its affiliated fund contributes or sells loans down into an SPV borrower, whose recourse to lenders is limited to the assets it holds, so that a default at the SPV does not necessarily infect the rest of the fund structure and, conversely, a bankruptcy at the parent fund should not reach assets that have been properly transferred to the SPV. Achieving that insulation requires the transfer of loans into the SPV to be respected as a true sale rather than recharacterized as a secured loan back to the parent, and requires the SPV itself to be operated with the separateness and independent-director protections needed to avoid substantive consolidation with the parent's bankruptcy estate should the parent ever become insolvent. Within that structure, advance rates and asset eligibility are typically more granular than at the fund level, lenders often retain greater discretion to characterize a given loan (for example, treating a highly levered first-lien loan as a unitranche asset carrying a lower advance rate), and loans purchased at a discount, excess concentrations and defaulted loans are subject to borrowing-base haircuts.
The sentiment underlying this improvement is worth noting. Much of the negative private credit commentary that circulated over the past two years overstated portfolio stress in places, or treated ordinary workout activity as evidence of broader weakness. As that narrative has been weighed against actual portfolio performance, a number of the lenders and investors who had paused, tightened terms, or reduced their exposure are returning to the market. Some banks that had scaled back their ABL books are restoring capacity, and insurance companies and other institutional investors that had trimmed exposure to private credit-linked paper are showing renewed appetite. For sponsors, that is translating into somewhat more favorable execution: more competitive pricing, steadier advance rates, and a broader set of lenders willing to engage, consistent with the broader theme of this OnPoint that debt capital is finding its way back to BDCs across the financing stack.
V. The CLO Moment: Term Financing Finds Its Footing in BDC Portfolios
A continuing structural development in BDC financing over the past two years has been the growing use of the CLO market, both broadly syndicated and middle-market, as a direct financing tool for BDC-originated loan portfolios, rather than merely as an investment BDCs make on the asset side of their own balance sheets.
Why CLOs?
A CLO issuance is term financing: once priced, its cost of capital and tenor are fixed for years, and, unlike a marked bank facility, a CLO is not subject to margin calls or an asset-value-driven borrowing base that can compress abruptly in a stressed market. In an environment where ABL pricing is rising, advance rates are falling, and the number of willing bank lenders is shrinking, a term, non-mark-to-market CLO becomes a natural complement, or in some cases substitute, for a bank facility. Middle-market CLO issuance specifically allows a BDC's manager to finance its direct lending activity on a committed, multiyear basis, insulated from the same redemption-driven pullback that has been reshaping the ABL facility market. This is precisely what we are seeing our BDC clients do: rather than treating a CLO as a one-time event, sponsors increasingly build it into their financing plan from the outset, alongside their bank and subscription facilities.
Mechanically, a middle-market CLO sponsored by a BDC manager is structured much like the ABL facilities described above, with the fund forming a bankruptcy-remote SPV issuer and transferring loans to it as collateral, but the financing raised against that collateral is arranged very differently from a bank facility. Rather than a single lender relationship, the CLO issuer sells rated, tranched notes to a range of investors, with the most senior class carrying the lowest coupon in exchange for the greatest par subordination and, typically, certain control rights, and can generally repay those notes early only after a non-call period has expired. In place of a marked borrowing base, note investors are protected by rating-agency-driven collateral quality and coverage tests, including par-based overcollateralization and interest coverage tests and agency-specific measures such as minimum weighted average spread, diversity score and weighted average life; if collateral defaults or trading losses erode those tests, cash flow that would otherwise go to equity or more junior notes is diverted to pay down the senior notes instead. These structures also tend to run at higher leverage than a typical ABL facility, with total leverage on some issuances reaching as high as nine times.
Convergence Between BSL and Middle-Market CLOs
The broadly syndicated loan CLO market and the middle-market CLO market, historically distinct in collateral type, liquidity and investor base, have begun to converge as private credit has scaled. Some middle-market CLO platforms are now originating larger, upper-middle-market loans that begin to resemble broadly syndicated credits, some middle-market funds have refinanced broadly syndicated positions coming out of workouts, and third-party equity capital has become more available to middle-market CLO managers pursuing an arbitrage strategy similar to that traditionally associated with the broadly syndicated market.
Who Is Sponsoring These Deals Is Changing, Too
Compressed loan spreads and relatively stable loan pricing have reduced current returns to broadly syndicated CLO equity, making that tranche less attractive to third-party arbitrage-driven equity investors and accelerating a shift toward captive equity funds raised and retained by the CLO manager itself. For BDC-affiliated managers, this dynamic reinforces the appeal of using a CLO to finance directly originated loans: the manager retains the equity economics internally (or syndicates it to an affiliated captive vehicle) rather than depending on third-party equity demand that has become less reliable quarter to quarter.
Regulatory Backdrop Affecting CLO Issuance
Several recent regulatory developments directly bear on how BDCs and their managers are using the CLO market. U.S. banking regulators rescinded their participation in longstanding interagency leveraged lending guidance in December 2025, a change credited in part with facilitating growth in nonbank leveraged lending. Separately, federal regulators confirmed favorable accounting and investment-limitation treatment for certain CLO instruments, including guidance permitting registered funds to invest in CLO debt securities without those investments counting against fund-of-funds investment limitations, and guidance on receivables-style accounting treatment for certain CLO loan tranches.
On the insurance side, the NAIC continues to review risk-based capital treatment for CLO securities generally, including scrutiny of reliance on external credit ratings and potential capital arbitrage, a workstream with direct relevance to any CLO structure, including a BDC-sponsored CLO, that is marketed in part to regulated insurance company investors. In Europe, recent regulatory guidance has tightened the requirements for a CLO manager to qualify as a risk retention holder, prompting a shift in market practice toward forward purchase agreement structures to preserve that qualification.
For a fuller technical picture, our ICLG chapter also covers CLO/ABS hybrid structures — a related, more niche securitization format increasingly used to finance recurring-revenue and late-stage lending loans, typically for venture-backed obligors in the technology, software and healthcare sectors. These structures borrow a CLO's reinvestment flexibility while retaining a cash-flow, borrowing-base approach instead of a coverage-test structure, and we expect to see further growth in this space in the years to come.
VI. Beyond Secured Facilities: Unsecured Notes and Structured Credit Products
BDCs continue to raise unsecured debt capital directly from institutional investors through privately placed notes issued in reliance on the Section 4(a)(2) exemption from registration under the Securities Act of 1933, alongside the secured facility structures discussed above. These privately placed "institutional notes" are typically sold to insurance companies and other institutional investors without a public offering or an active secondary market, giving BDCs an unsecured source of term capital that sits outside the leverage spectrum described elsewhere in this OnPoint and is generally not subject to a borrowing base or portfolio-level collateral package. These notes typically carry covenants that mirror those in the BDC's corporate ABL facility, including affirmative, negative and financial covenants and most-favored-lender protections, and pricing often steps up if the BDC falls below investment grade or breaches a secured leverage threshold. A single note purchase agreement can also accommodate multiple tranches of notes issued at closing, on pre-agreed future dates, or at a later date to be mutually agreed, with tenor and prepayment terms varying by tranche. Based on our general market experience, we note that continued investor appetite in this market can make Section 4(a)(2) note placements a useful complement to a BDC's secured leverage, particularly for platforms seeking to diversify their capital structure and extend duration without pledging portfolio assets.
BDCs (as registered funds) also have access to two public or semi-public unsecured formats that private funds generally do not: baby bonds and convertible notes. Baby bonds are senior unsecured notes marketed and sold to both retail and institutional investors. They are typically sold in small denominations, marketed in an SEC-registered underwritten offering, and listed on a national exchange to facilitate retail trading, and their covenant package is comparatively light, generally limited to core protections such as leverage restrictions. Convertible notes, by contrast, are usually sold to qualified institutional buyers in a Rule 144A offering and combine the seniority of a note with potential upside through conversion into the BDC's equity at a premium (typically at least 10%) to the then-current share price; because of that equity optionality, convertible notes usually carry a lower coupon than baby bonds or comparable straight unsecured debt. Both formats give a BDC a further channel for accessing unsecured leverage, at the cost of the incremental disclosure and offering process each format requires.
Finally, at the more specialized end of the toolkit, some private debt platforms use structured credit products, including repurchase agreements (repos), total return swaps (TRS) and forward contracts, to obtain financing with potentially more attractive economics. In each of these formats, the lender obtains an ownership interest in, rather than a security interest over, the financed portfolio, which is typically structured to translate into preferential bankruptcy and regulatory-capital treatment for the lender and, in turn, better pricing for the borrower. The trade-off is periodic mark-to-market margining, less direct control over the financed assets during the term, and documentation that can be confusing for borrowers encountering it for the first time. We flag these structures here because sophisticated platforms increasingly view them as an additional, if more specialized, lever alongside subscription, ABL and CLO financing.
VII. The Full Picture: Putting the Pieces Together
None of these financing tools operates in isolation, and the more sophisticated BDC platforms are increasingly using them in combination rather than choosing a single structure. Having come full circle from a period of heightened caution, driven in part by headlines that overstated the risks in private credit, to one of steadier and renewed engagement, a subscription-style facility can support ongoing liquidity management while a CLO handles term financing of the seasoned portfolio, with ABL facilities, which are again attracting lender and investor interest, retained as a flexible source of incremental capacity for growth or timing gaps. The relative weighting among these tools for any given platform depends heavily on where the BDC sits in its life cycle, the composition and sector concentration of its portfolio, and the platform's own growth trajectory. Across our own client base, we are observing fewer sponsors default to a single financing relationship and more sponsors actively build a diversified stack from the start.
The bottom line: BDC financing has never been more dynamic, and the momentum is real. Sponsors that build a diversified, multitool financing stack today are the ones best positioned to capitalize on the next stage of private credit's growth. The BDC financing story has come full circle, and it is just getting started.
For a deeper technical discussion of these and related financing products — including fund-level ABL structuring mechanics, loan-to-SPV facilities, CLO/ABS hybrid structures, rated note offerings, and repo, TRS and forward contract documentation — see Dechert's chapter, Financing Your Private Debt Platform, available at: Financing Your Private Debt Platform – Lending & Secured Finance 2026
